1031 Exchange / Capital Gain Rule of Thumb(s)?

Question

Hey BP community!

Just wondering if anyone has any guidelines in regards to when its worth it to have a 1031 exchange in certain real estate sales.

My current sale is going to have me owe about 35-45k in capital gains tax. Im contemplating even having an exchange. Pros and cons? I can reserve the proceeds from the sale and be patient about a good deal, or be time constrained and have to follow 1031 rules and find a new purchase within 45 days. This is my first rental sale.

--My goals? Not sure if this is very common, however I love idea of cash flow (only $300/mo on property that's being sold - vs - I have an old contractor friend of mine which would help with flipping, or I would not mind seeking a partner for commercial real estate.-- Just a side note if it helps with your response.

Dave Foster · Answer

@Brandon Rodriguez, one cocktail napkin analysis would be to ask how likely you are to get a 12% ($35K) discount on an already good deal of a $300K property (or the appropriate % for whatever size property you are selling) if you take your time right now. Is so then that equals what you give up on the 1031 side.

If you can't find the good deal plus another 12% on a $300K property by taking your time then you ought to look seriously before you let $35K go in tax.

And if you're really good you'll have a great team around you and take advantage of both the 1031 and finding an awesome deal during the exchange periods. Exchange fees usually are small enough that they're worth paying just for a chance to see the flop of what's available immediately after your sale.

Brandon Rodriguez · Answer

Hi @Dave Foster, thank you for your response. Somehow I missed that fact that I can do both options, kind of. As you pointed out, if I dont find a deal within the allotted amount of days, then I would let it go to taxes. A few numbers on this property: initial purchase price was 274k, listed at 450k. From the calculators I have used, the average I would owe after all expenses etc would be 40k.

Your opening sentence is on point. Thank you.

1031 Exchange / Capital Gain Rule of Thumb(s)?

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